Netflix won a sweeping victory in a first-round court fight with South Korea’s tax authorities over corporate taxes.
The Seoul Administrative Court’s Administrative Division 6, led by Presiding Judge Na Jin-i, ruled on Monday that 68.7 billion won of the roughly 76.2 billion won in corporate tax assessed against Netflix Services Korea should be canceled. The decision effectively found about 90% of the assessment legally unjustified.
The dispute centered on large payments Netflix Services Korea made to a Netherlands-based affiliate, Netflix International B.V. (NIBV).
In a 2021 tax audit, the National Tax Service said it found Netflix had sent more than 80% of its revenue earned in South Korea to its overseas headquarters as management advisory fees and content usage fees. The agency viewed that as tax avoidance that shifted domestic income abroad and reduced reported profit.
Tax authorities argued Netflix Services Korea effectively exercised content copyrights, making the payments royalties subject to withholding tax.
The court disagreed. It said core functions such as storing and transmitting content to South Korean consumers are carried out through a service architecture managed by NIBV. Netflix Services Korea, the court said, performs only ancillary work such as platform operations and marketing, making it difficult to view the Korean unit as the entity that directly uses copyrights to generate revenue.
Based on that, the court classified the payments not as copyright royalties but as business income paid for streaming services provided by the overseas entity. Under the Korea-Netherlands tax treaty, the court noted, South Korea cannot tax such business income unless the foreign company has a fixed place of business in the country.
The court also cited Netflix’s revenue-sharing structure. Netflix Services Korea is guaranteed a set operating profit margin after costs are deducted from subscription revenue, and it remits the remaining amount to headquarters. If the Korean unit posts a loss, headquarters may cover it.
While tax authorities saw that structure as a way to artificially lower profits in South Korea, the court said the pricing method supports the view that the plaintiff does not independently use copyrights.
The court added that even if the overseas entity had provided services directly to South Korean consumers without an intermediary, the income would still be business income outside South Korea’s taxing rights. It said it was hard to conclude that placing Netflix Services Korea in the middle was a tax-avoidance scheme designed to circumvent domestic law.
Netflix did not win on every point. The court upheld corporate tax tied to Netflix’s OCA (its own cache servers) installed on domestic internet service provider networks.
Netflix argued in earlier hearings that it bought the OCA equipment and transferred it to ISPs free of charge, so it should be treated as a consumable expense. The court found, however, that the OCA is used solely to provide Netflix services smoothly and remains an asset over which Netflix exercises practical control. It concluded that taxing the portion treated as an expense rather than booked as an asset was lawful.
The ruling is expected to slow the tax agency’s efforts to tighten enforcement on global big tech companies. The article said Netflix generates revenue in the hundreds of billions of won in South Korea while paying corporate tax of only about 0.2% of sales, in the 3 billion won range, and that imbalance is likely to persist for now. Tax authorities said they will review the written decision closely before deciding whether to appeal.
The court also expressed concern about limits in the current legal framework. In its decision, it wrote that even if low domestically realized income produces an unreasonable outcome, the issue should be addressed through arm’s-length adjustments under transfer pricing rules or through legislation.
The ruling could affect tax litigation involving other global IT companies such as Google and Apple. With debate in the National Assembly active over introducing a digital tax often called a “Google tax,” civic groups are expected to keep pressing for legislative changes that redefine the concept of a fixed place of business for the digital environment.
* This article has been translated by AI.
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